Innovation and competitive advantage: what we know and what we need to learn
Cynthia A. Lengnick-Hall
Innovation, technology advances, and competitive advantage are
connected by complex and multidimensional relationships. This article
begins by examining four factors that shape the relationship between
innovation and competitive advantage. Routes to corporate entrepreneurship
(research and development units, intrapreneurship/internal
ventures, external joint ventures and acquisition) are compared in
terms of these criteria. The debates and questions that set the stage for
further research in this area conclude the article.
Demands for organizational innovation and technological advantage are increasingly crucial components of competitive strategy for many firms (Buffa, 1984; Butler, 1988; Miller 1989). Most firms face serious competitive challenges due to the rapid pace and unpredictability of technology change (Ansoff, 1988). Industries dependent on highly sophisticated technologies and firms engaged in multinational competition are particularly vulnerable to the need for continuous and rapid modification of their product features and the ways in which they conduct business (Teece, 1987; Waterman, 1987). Hax (1989) argues that global strategies are dependent in large part on accelerating the speed at which innovations are translated into profitable commercial ventures. These conditions have led management theorists and practitioners alike to call for more creativity in management practices, products, and production processes (Wheelwright, 1987) and for greater attention to be paid to the technology strategy a firm employs (Malekzadeh, Bickford, & Spital, 1989; Miller, 1989). When new product or process development is a key strategic requirement, a firm must be able to advance technology and know-how, exploit these capabilities, and gain market acceptance of new ideas, concepts, and production requirements (Scarpello, Boylton, & Hofer, 1986).
Several common themes emerge repeatedly across studies to suggest that the link between innovation activities and competitive advantage rests primarily on four factors. One, innovations that are hard to imitate are more likely to lead to sustainable competitive advantage (e.g., Clark 1987; Porter, 1985). Two, innovations that accurately reflect market realities are more likely to lead to sustainable competitive advantage (e.g., Deming, 1983; Porter, 1985). Three, innovations that enable a firm to exploit the timing characteristics of the relevant industry are more likely to lead to sustainable competitive advantage (e.g., Betz, 1987; Kanter, 1983). Fourth, innovations that rely on capabilities and technologies that are readily accessible to the firm are more likely to lead to sustainable competitive advantage (e.g., Ansoff, 1988; Miller, 1990).
This article begins by considering the four factors that define the relationship between corporate innovation with competitive advantage in greater detail. The second section offers a look at how different approaches to corporate entrepreneurship result in different opportunity and problem patterns related to these four factors. Some of the relationships enhance innovation activities; others make innovation more difficult. Some make it easier to sustain the benefits of successful innovations; other relationships make this more challenging. The last section of the article examines questions and debates that can provide an agenda for further study of innovation and competitive strategy.
The less a strategy can be imitated, the more durable the source of competitive advantage (Porter, 1985). Given the array of capabilities needed to sustain effective corporate entrepreneurship, innovation provides an attractive source of competitive advantage if it creates positive synergy for the finn. Likewise, if the innovation process or the outcomes of innovation are difficult to copy, effective corporate entrepreneurship becomes an increasingly important ingredient in sustaining competitive advantage. Some (e.g., Lawless & Fisher, 1990) suggest that product form, function, pricing, and distribution offer potential avenues for reducing imitability for innovative firms. Others argue that managerial innovations, such as the strategic management of human resources (Lengnick-Hall & Lengnick-Hall, 1988; Schuler and Jackson, 1989), or information-based innovations, such as new market research techniques (Tornatzky & Solomon, 1985), provide more durable routes to competitive positioning than can be gained from product innovations. Still others (e.g., Spencer & Triant, 1989) recommend that firms only specialize in developing technologies that have pivotal importance to their business in order to protect imitability of key competitive elements. The common thread is identifying outcomes that are difficult for other firms to replicate.
The concept of strategic configurations (Malekzadeh, et al., 1989; Miller & Mintzberg, 1984; Van de Ven & Drazen, 1985) provides a useful way to look at innovation and imitability. Strategic configurations describe broad, natural bundles of various elements that compose a firm’s strategy such that distinct archetypes or attribute constellations are produced. Configurations expand the notion of fit from looking at paired elements (e.g., strategy and structure; size and technology) to multidimensional clusters. Three arguments in support of configuration approaches are offered by Miller and Mintzberg (1988): internal consistency, population ecology, and incrementalism. Configurations represent a synthesis of strategic preferences and constraints, but do not specify direct causal relationships among individual factors. The premise of configurations is compatible with the growing body of empirical evidence supporting an intrinsic intertwining of strategy formulation and implementation (Burgelman, 1984).
Porter’s (1985) cost leadership and differentiation clusters and Miles, Snow, Meyer, and Coleman’s (1978) defender, prospector, analyzer, reactor archetypes offer two widely known examples of early steps toward configuration. Although each of these composites reflects a unifying perspective, many important strategic choices are discretionary. The specific choices a particular firm makes regarding its product/market arena, design, information processing, coordination, human resource management, and similar strategic elements can be firm-specific and offer unique synergies not available to other organizations demonstrating the same basic configuration. It is these unique differences, these distinctive ways of attaining and reinforcing the configuration, that can make it difficult for one firm to imitate another.
Configuration perspectives suggest that one important link between innovation and sustainable competitive advantage is the way in which approaches to innovation fit with other aspects of the configuration. If innovation is undertaken in a way that complements and opportunistically exploits distinct competencies that result from the firm’s configuration, the innovation is likely to lead to competitive advantage. If, on the other hand, innovation activities do not fit with other configuration elements, it is less likely that a sustained competitive advantage will result. A serious misfit can inhibit competitive advantage in two ways. One, innovation activities can lead to configuration imbalances. For example, a firm can become so enamored of elegant engineering detail that manufacturability or market demand is forgotten. Miller (1990) describes this as accelerating from pioneering to escapist behaviors. If innovation activities dysfunctionally emphasize some elements of the configuration at the expense of others, and thereby reduce the firm’s long-term flexibility, this misalignment can inhibit the firm’s ability to create competitive advantage. A second way misfit can reduce competitive advantage is through continuously battering the synergies developed throughout the configuration. For example, if innovation activities undermine collaboration by triggering frequent, discontinuous changes in structure and culture, sustained competitive advantage is less likely to occur. Ansoff (1988: 59) argues that innovations that continuously move a firm into unfamiliar areas bring a distinct danger of negative synergy.
Issues such as structure, culture, human resources, and strategy patterns link innovation activities and imitability. These issues differ from other factors linking innovation and competitive advantage in one important way: configuration problems often increase with innovative success and the implementation of creative solutions. Successful innovation typically generates a need for change, thus creating new problems for maintaining the configuration. In this way, success can trigger the unraveling of a firm’s existing strategy pattern because new capabilities, structures, preferences and relationships are frequently required to exploit innovation (Jelinek, 1986). Following Jelinek’s line of reasoning, success in innovation triggers a competitive reorientation. This, in turn, alters organizational goals. The established pattern can impede rather than facilitate a firm’s ability to achieve the newly embraced goals. Emerging problems introduce contradictions and provide an incentive for managers to rethink their package of strategic choices. At the extreme, the configuration shatters and suboptimization results.
The outcomes are no better if a firm chooses to resist change as it innovates and diversifies. The consequences of neglected structural and cultural implications of increased diversification and organizational differentiation are noted by Chandler (1962). New products often require new structures to foster market exploitation. Thus, innovation activities must be compatible with a firm’s ability to manage potentially radical organizational change (Allaire & Firsirotu, 1985). This capability can be taken to an extreme. Reactor firms (Miles, et. al., 1978) unnecessarily sacrifice organization stability, coordination, and efficiency in their emphasis on change. Some firms continually reinvent the wheel in their search for administrative solutions.
The more radical the innovation, the more pervasive and profound its influence will tend to be (Quinn, Mintzberg, & James, 1988). Continued success in implementing entrepreneurial outputs often requires an ability to reorient a firm’s values, norms, and culture. Quinn (1985) forcefully presents this atmosphere and vision requirement in his blueprint for effective corporate entrepreneurship in large organizations. Likewise, Miller (1990) describes R&D cultures as optimistic, receptive, participative and flexible. Yet, taken to extremes, cultural adaptation can engender a loss of corporate identity and lack of strategic clarity. Kanter (1983) argues that effective change organizations have a focused, concentrated sense of purpose. People Express, for example, lost this concentration when they sacrificed organizational stability and effectiveness in their emphasis on change. Miller (1990) describes this breakdown as creating a chaotic think tank spurred on by blind utopianism. As Tushman and Nadler (1986) explain, successful innovation requires a complex balance between stability and change.
Human resource expectations are a particularly important element in the configuration. Human resource management represents an investment in human capital. Successful corporate entrepreneurship is an important return on this investment. Entrepreneurial activities are challenging and as such can contribute to a job’s motivation potential (Hackman & Oldham, 1975) or can place excessive demands on a firm’s human resources. Although human resources can be quite flexible, and are often key generators of innovation, they must be adequately maintained, rewarded, and nurtured if benefits are to be sustained. Innovation often means that knowledge, skills, and abilities required to make recurring contributions to organizational effectiveness will change. Ignoring such changes, or assuming they will occur without deliberate actions, is an easy way to undermine an otherwise successful venture. However, excessive investment to enhance individual capabilities can lead to extravagant megaprojects (Miller, 1990) that have little market application.
Both innovative success, and subsequent requirements for sustained exploitation, provide incentives for change in the strategic configuration. If, for example, successful corporate entrepreneurship leads to a redefinition of the firm’s product-market scope, a shift in domain posture from defender to analyzer may be appropriate. Likewise innovative success might enable a firm to broaden its market appeal by introducing cost savings as well as unique features. Successful adaptability requires both knowing when to change and knowing when change is not appropriate (Tushman & Nadler, 1986). Innovation activities that help a firm make correct choices will have a greater probability of creating competitive advantage. As Clark (1987) points out, the foundation of competitive advantage is the set of capabilities such as human skills and relationships, material resources, and relevant knowledge that a firm uses to build products and deliver services having marketplace appeal.
Accurate Reflection of Market Realities
A second recurring theme in the examination of innovation and competitive advantage is the importance of acting upon market realities. Market issues and opportunities are largely driven by customer value chains (Porter, 1985). This value chain can be obvious or it can be obscure. The customer’s expectations can be observable, unmet needs. Innovations of this type often rely on applying modifications of existing technologies in new ways for new markets. Miller (1990) examines the introduction of Federal Express overnight service from this perspective. Alternatively, customer demands can reflect latent preferences only recognized once a product or service is introduced to meet the expectation. The development of silk plants, hair spray, and post-it notes offer examples of this type of need.
Market realities introduce two related, but distinct requirements for successful corporate entrepreneurship. First, creativity should embrace important and attractive elements in the potential buyer’s value chain. Innovations must have an application that is desired, reasonably pervasive, and of some threshold utility to generate a competitive advantage. Second, innovations should omit trivial or undesirable features. Simply because a product has distinctive and innovative features does not guarantee that a sufficient number of customers will be willing to purchase those features. As with managing the configuration, responding to these two factors requires perspective and balance.
To ensure that important and desirable features are included in the product and/or service, the innovator must be focused on the customer. Customer-driven innovation is a common thread among quality gurus like Deming (1986), Crosby (1979), and Feigenbaum (1991). The vocabulary of quality function deployment (a system for specifying and responding to customer interests) and total quality control (satisfying internal as well as external clients) eloquently speaks to the need for recognizing and responding to specific customer preferences for performance, features, reliability, conformance, durability, serviceability, aesthetics, and perceived quality (Garvin, 1983). Innovative responses can enable a firm to either position itself within an attractive niche or to meet a larger proportion of customer preferences than its competitors. Both the niche approach and a broad differentiation approach are attractive and sustainable competitive options (Porter, 1985).
An ability to respond to a wide and shifting range of customer interests, however, is linked with generating a steady stream of innovation activities (Kanter, 1983). Waterman (1987) argues that informed opportunism is the key to competitive innovation over the long term. His reasoning is that a steady investment in research and innovation activities generate a powerful source of information that supports product-oriented opportunistic action. Such activities keep a firm informed about relevant technology and gives managers a feel for what might be useful in the marketplace. He reasons that if innovation activities are so carefully managed that they only react to demonstrated customer interests, this situation can contribute more to driving out invention than creating it.
However, a steady innovation investment increases pressure for market results. Likewise, the creation of new technology can lead to projects whose cost, complexity and risk far exceed organizational resources and market interest or willingness to pay (Miller, 1990). Unbridled attention to a firm’s technological or engineering capabilities can yield over-commitment to unmarkatable ventures.
Vulnerability to market problems of either inadequate value or excessive differentiation increase if decision-makers are unfamiliar with industry structure in new product/market areas (Porter, 1985). For example, defense contractors have, at times, developed “spec-sheets” that guarantee a bid far above maximum resource limits or performance expectations. A firm stressing function and performance in a market concentrating on fashionability, neglects a critical element of product scope. Similar results accrue if a firm is unable to sufficiently signal value (Porter, 1985). Market errors occur because a firm does not understand a buyer’s value chain, assumes factors valued in one market segment are generalizable to other niches, or depends on internal biases regarding what the marketplace should value.
The link between innovation and market-based competitive advantage is based on four factors. First, management must facilitate and maintain sufficient innovative activity to create a firm that is prepared, but nimble and ready to act (informed opportunism) (Waterman, 1987). Second, the firm must not feel so compelled to act from pent-up ideas that irrelevant or trivial product features are introduced to the market (Miller, 1990). Third, decision-makers must thoroughly understand the customer so as to be able to make appropriate decisions on which features to include and which to exclude (Deming, 1986). Fourth, decision-makers must have sufficient expertise as to potential applications of their innovation activity that latent customer needs can be identified (Feigenbaum, 1991). Timing
A third element linking innovation and competitive advantage is timing. The definition and implementation of a firm’s product/market strategy often reflects timing considerations (Hambrick, 1982). Technology timing depends on development speed and direction and a firm’s ability to capitalize on these progressions (Clark, 1987). Timing can have a substantial influence on the cost of a venture (Porter, 1985). Markets driven by brand identification may offer important first-mover cost advantages. In these industries, being first enables a firm to gain committed customers before competitors are actively engaged. Timing may introduce a meaningful source of uniqueness or effective cost leadership (Teece, 1987). Being first can enable a firm to gain valuable experience before their competitors. Alternatively, in industries noted for high technological uncertainty and low switching costs (e.g., computer components), early followers may gain cost advantages. As Porter (1985) argues, competitive timing is closely linked with market conditions. Early follower advantages often result from the high levels of uncertainty accompanying technological substitution (Robert & Berry, 1985). Undue caution in circumstances offering first-mover advantages or premature introduction in situations according follower advantages lead to timing mistakes. On the other hand, innovation activities effectively timed to suit industry conditions can be a valuable tool in the competitive arsenal.
Requisite Capabilities for Exploitation
The fourth pervasive theme shaping the relationship between innovation and competitive advantage is specific organizational capabilities needed to exploit and sustain innovation. Effective exploitation reflects a wide range of competencies. Teece (1987), for example, argues for control of assets that complement a new concept. Ansoff (1988) suggests that effective entrepreneurial strategies are dependent deterring price sensitivity in the marketplace. Exceptional firms are able to manage both radical breakthrough and nuts-and-bolts technology change (Marquis, 1972). Many (e.g., Burgelman & Maidique, 1988; Damanpour & Evan, 1984; Leonard-Burton, 1987) contend that cross-functional and cross-product integration and continual organizational learning are mandatory competencies for effective innovation exploitation. Effective management of resource allocations is an essential competence (Kanter, 1983). Many of these abilities signal an interest in developing potential synergies. However, as Ansoff (1988) points out, synergy is often achieved at the expense of strategic flexibility. Thus, strategic rigidity or escalation of commitment to a given technology reflect a down-side to investing in exploitation capabilities.
Contingency perspectives affirm that different types of innovation require different sets of competencies (Miller, 1990). Creating a new market requires intimate knowledge of the intended customer so the product will be seen as useful and desirable (Miller, 1990). Innovations that create markets require extensive promotional talents, intraorganizational networks to build the needed infrastructure (Porter, 1985), and sufficient organizational and human commitment to overcome delays and resistance (Kanter, 1983). Innovations that aim to extend technology and expand the market are aided by an established, strong position in the focal market, an ability to promote technological leap-frogging (Miller, 1990), intimate knowledge of current industry conditions and emerging industry trends (Porter, 1985), and substantial operating and marketing synergies (Ansoff, 1988). Radical innovations intending to redefine markets and make pathbreaking change depend on understanding established markets coupled with a creative visionary twist (Miller, 1990). A firm’s ability to shape industry practices, effectively use consumer feedback, design complementary products, and influence other industry players may have as much importance as the original innovation on ensuring successful adoption (Anderson & Tushman, 1990).
Innovation can trigger a reshaping of the market environment. Schroeder (1990) explains that the effects of innovation are dynamic and have different effects on industry segments at different times. Impact on competition is asymmetric, variably affecting firms in distinct strategic groups. The consequences of innovation are driven by on-going innovation development, the emergence of complementary technologies, and the widening use of a new idea. In this way, he contends, innovation breeds more innovation. Winners and losers are created by actions that firms take in response to an innovation’s competitive impact. Innovation launches opportunities for the entrepreneurial firm and for astute and flexible competitors as well. Thus, innovation is an important vehicle for shaping the competitive environment as well as responding to it. The key element linking organization competencies and competitive advantage is defining and achieving the appropriate contingent capability profile.
Innovation and Competitive Advantage
Selecting a specific competitive strategy often determines a firm’s need for successful innovation. For example, Utterback and Abernathy (1975) found performance maximizing strategies emphasize technology and product advances as a key to competitive advantage. Similarly, they argue, cost minimizing strategies emphasize process technology innovation to decrease the total costs of production. Product innovation provides the focus of a domain offense strategy (Miles, 1982). Galbraith and Schendel’s (1983) study showed a strong empirical link between strategy choice and R&D investment. Climber, niche, and builder strategies were dependent on a strong commitment to successful R&D in order to achieve required sales expansion and market share gains. In contrast, harvest and cashout strategies yielded low R&D, signaling decreased support for the product area.
Effectively using innovative activity to create competitive advantage is dependent on a firm’s ability to maintain its configuration, direct its attention toward desirable product features and service activities, avoid investing in irrelevant but creative ventures, secure timing advantages, and maintain appropriate ancillary capabilities to adequately exploit innovation outcomes. Different routes to innovation offer different strengths and weakness along these dimensions.
Routes to Corporate Entrepreneurship
Internally-based entrepreneurship activities can be undertaken through traditional research and development units, through efforts of individual employees (intrapreneurship), or through units dedicated to the development of new products or technologies (internal ventures). With R&D, and intrapreneurship/new venture activities, the entire innovation process is carried out in-house. Joint venture activities and acquisition offer external means to achieve innovation.
Although not exhaustive, these four approaches represent important distinctions along a continuum, from designs for entrepreneurship that are managed entirely within a firm’s boundaries, to methods that blend the resources of two or more firms during the innovation process, to approaches that rely on obtaining outcomes of innovative activities conducted by an outside organization. The internal versus external dimension is acknowledged by Pisano (1990), Drucker (1985), Howard and Moore (1982) and Marquis (1972) as a critical feature distinguishing one approach to innovation from another. The “make or buy” distinction carries with it implications for process control, exit options, and share of rewards that accompany success. Routes to innovation that are internally based concentrate on a firm’s capabilities. Because external actors are involved, environmental threats, opportunities and linkages must be managed. External involvement enhances the repertoire of knowledge, skills, and talents available, while increasing the level of complexity required to manage corporate entrepreneurship.
Research and development is perhaps the most widely used innovation approach (Kelly and Kranzberg, 1978). However, many firms have turned to alternatives such as internal and/or external ventures or partnerships (Roberts, 1983), acquisitions (Parsons, 1984), and a range of hybrid options. Although a range of approaches can play an important role in helping organizations respond to threats or exploit opportunities, a particular mix of innovation approaches can aggravate organizational sore spots or enhance corporate strengths. A closer look at some common routes to corporate entrepreneurship indicate quite different patterns of problems and advantages across the configuration, market, timing, and capability factors associated with achieving competitive advantage through innovation. These patterns are presented in Figure 1 and discussed in greater detail below.
Research and Development
An R&D unit consists of specialists who focus on innovation and the creation of knowledge as their primary objective (Johnson, 1984). These specialists, usually concentrated in one area of the organization, generate not only new products and ideas, but also develop new manufacturing processes, new applications, or improved packaging and delivery systems. Merck, Motorola, and defense contractors like Raytheon are noted for an R&D approach to corporate entrepreneurship.
Configuration issues. Effective R&D uses existing organization skills and encourages consideration of functional capabilities and constraints. This initially reduces threats to the strategic configuration. R&D entails a low risk of long-term over-commitment to a project that will undermine the firm’s structure, culture, and human resource management practices, because existing organizational biases dominate the weeding-out process (Baldridge & Burnham, 1976; Moch & Morse, 1977). With R&D the choice is to err on the side of organizational stability rather than the pursuit of unnecessary change. R&D is less likely than other routes to innovation to initiate a loss of identity (Johne & Snelson, 1988). Taken to the extreme, however, Kanter (1983) recognizes that myopic focus can stifle innovation. An excessive concern with using existing means for success can dilute the benefits of configuration (Miller, 1990). The need for a balance between focusing on innovations that the firm can and desires to exploit, on the one hand, and maintaining a sufficiently broad belief that the firm can exhibit informed opportunism (Waterman, 1987) on the other hand, requires extensive communication.
Communication between innovation participants and others in the firm is essential. Yet integration is not without costs. Increased interaction and relatedness requirements for new products may come at the expense of a decreased rate of innovation (Jaikumar, 1986). Further, integration and coordination places additional task burdens on an R&D unit (Westwood, 1984). Some (e.g., Biggadike, 1979) argue that augmented integration and communication requirements increase the average length of time for a return from an internally-derived innovation and raises the level of financial investment required. Others (e.g. Deming, 1986) argue that up-front consideration of all internal and external stakeholders is a key factor in reducing the overall development time.
One caveat should be recognized. Ansoff (1988) describes the “R&D monster” in which innovation, fueled on its own success, results in over-commitment of the firm across financial, market, technology, and organizational areas of concern. Similarly, Miller (1990) describes the innovation trajectory in which a pioneer firm escalates to an escapist. When R&D is accelerated to the point where it begins to have a life of its own, it can create irrelevant products, increase the technological intensity of the firm to the point of dysfunction, inaugurate an insatiable demand for financial resources, and independently direct growth and strategic intentions. Such dysfunctional escalation of commitment to R&D is more likely to occur the more the firm’s success pattern has been directly caused by past innovative successes (Miller, 1990). The emergence of this “monster” signals a serious threat to the strategy configuration.
Thus it appears that R&D presents a curvalinear relationship with configuration. At the extremes, R&D can accentuate either myopic views or escapist irrelevance. For the majority of situations, though, R&D tends to support the strengths of the existing configuration.
Market issues. R&D usually focuses where a firm has an existing competitive advantage (Kanter, 1983). Such focus means an opportunity to gather direct information on customer preferences through existing operations. Used wisely, this can offer an important advantage for defining quality objectives that may be hard to imitate. If R&D units are isolated from marketing, however, opportunities to capitalize on this knowledge are limited. Formal and informal pressures for continuation of a pattern can lead to an undue emphasis on current strengths (Gilmore & Coddington, 1966). Such emphasis can result in inadequate value or misdirected differentiation. R&D is vulnerable to developments that fit the firm’s internal preferences but are not market-competitive. R&D approaches offer significant advantages for ensuring that high-value features are included if the firm sticks to areas where they have existing expertise in marketplace preferences.
R&D is particularly weak in screening low-value features when such features are important elements in prior success or related products (Ansoff, 1988). R&D activities may draw heavily on existing corporate strengths that may not apply in new market, product, or technology arenas (Ansoff, 1988). If developing operating synergy is a dominant concern, opportunities for relatedness may overshadow market acceptance (Johnson, 1984). This situation can result in excessive differentiation (Porter, 1985) or investment in technologically elegant but irrelevant product features (Miller, 1990). Likewise, products developed through R&D are more likely than those developed through other means to be abandoned prematurely due to a perceived lack of fit with the organization’s current strategy and capabilities (Johnson, 1984). Investing in competing ideas for a particular need reduces the potential for omitting important product features, yet this approach raises financial requirements (Marquis, 1972).
Timing. R&D approaches are strong on knowledge surrounding timing issues. Because the entire venture is managed internally, a firm can control when and how innovations are introduced to the market arena (Drucker, 1985). If entrepreneurial developments are related to other business activities, the firm has likely developed sufficient expertise to effectively judge the consequences of different timing options (Johnson, 1984). However, cumbersome decision-making practices that often accompany R&D limit a firm’s ability to capitalize on its expertise (Drucker, 1985).
Substitution threats are one area in which R&D is potentially vulnerable in terms of timing. Some substitutions rely on innovations that make a firm’s existing market expertise and manufacturing capabilities obsolete, whereas other substitutions build heavily on the capabilities of current participants (Anderson & Tushman, 1990; Porter, 1985). The extent to which the existing and the competing technologies are similar has a great deal to do with determining whether R&D can exploit timing advantages.
Exploitation capabilities. Burgleman (1984) contends operational relatedness (i.e., unrelated, partly related, strongly related) and the strategic importance of entrepreneurial efforts (i.e., very important, uncertain, not important) influence a firm’s ability to exploit new technology. Because R&D routes to entrepreneurship favor familiar product and market ventures (Gilmore & Coddington, 1966), exploitation capabilities are often a strength of R&D. However, if the market is unfamiliar, information gaps inhibit effective exploitation (Porter, 1985). Burgleman (1984) introduces three specific corporate capabilities as essential for effective, sustained corporate entrepreneurship activity. First, managers and internal entrepreneurs must develop skill at using various assessment tools to structure a non-zero sum game for the firm. Second, the firm must develop and maintain diverse measurement and reward systems to correspond to the diverse types of activity in which they are engaged. Third, all parties must be willing to continuously reevaluate and renegotiate as new information becomes available.
The more an R&D operation is concerned with efficiency, the more likely it is to introduce bureaucratic procedures and standard hurdle rates to assess innovative outcomes (Scarpello et.al., 1986). There is increasing evidence that traditional financial measurements may not apply in the innovative context (Lengnick-Hall, 1986). Routine financial resource allocation procedures may have great difficulty accommodating the exceptional project. Depending on a firm’s decision-making response to uncertainty, these factors can work to reduce investments in innovation and lead to underfunding or they can foster an undesirable escalation of commitment (Ross & Staw, 1986).
R&D units require constant funding regardless of whether current innovations are successful. Initial cash outlay is minimal for a particular project start-up because the lab and various personnel are funded on an on-going basis. Although there is a high probability that some activities will result in an economic payoff, there is a corresponding high probability that many investments will have no positive results (Baldridge & Burnharn, 1976). Thus the overall cash requirement for R&D is often high.
R&D offers both advantages and disadvantages with regard to resource sufficiency. Managerial processes are an important mitigating factor. R&D approaches are comparatively weak with regard to efficient financial resource deployment. Planned investments often neglect to consider costs related to overcoming any entry barriers for unrelated products (Porter, 1985). Related products, on the other hand, often suffer from assumed technological certainty or assumed synergy-based economies that may not materialize (Drucker, 1985). Underfunding is a common source of problems. R&D often creates a challenge for employees without creating unacceptable demands (Kozlowski, 1988).
Intrapreneurship and Internal Ventures
An intrapreneurship approach is characterized by individual employees working beyond their normal responsibilities to develop a specific potential product or process (Drucker, 1985). 3-M Corporation, Texas Instruments, and McDonalds are noted for this approach to corporate entrepreneurship. Bart (1988) explains how intrapreneurship differs from traditional R&D. First, employees are dedicated to a particular project outcome rather than to innovation in general. Second, employees are often responsible for all functional activities and for all phases of the innovation process. Time devoted to innovative ideas is “stolen” from regular duties at early stages of development. Later, employees are temporarily reassigned. Intrapreneurship uses existing organization skills, but refocuses these skills in new directions. Intrapreneurship efforts are often more idiosyncratic and unconventional than traditional R&D methods. Internal venture units or task teams such as those used by Apple in development of the Macintosh and those used at Digital Equipment Corporation for a host of projects expand intrapreneurship to the group level (Drucker, 1985).
Configuration. Increased visibility and personal commitment are particularly common with intrapreneurship approaches. Often this personal involvement leads to increased emotional investment and places high demands on human resources. Projects unrelated to current activities can take a long time to staff (Hardymon, Denino, & Salter, 1983) but once underway, such projects can signal a major change in the firm’s power coalition and center of gravity (Galbraith & Kazanjian, 1986). Related projects can require heroic efforts from organizational “champions” (Schon, 1963) leading to problems in performance evaluation and control of intrapreneurs (Burgelman, 1984). If too much time is spent on “pet” projects, the core mission of the organization may suffer. Because prominent individuals often serve as champions for new projects, intrapreneurship activities often introduce a ratchet-effect with regard to change in the strategic configuration.
Internal ventures are often separated from the rest of the company. Separation provides greater independence, freedom from short-term pressures, different rewards, improved visibility, and access to key decision-makers (Roberts & Froman, 1972). This separation facilitates problem solving, but can lead to inaccurate, often optimistic, analysis (Killing, 1980). Despite an initial separation of internal venture projects from the rest of the organization, organization climate concerns remain. If successful, reintegration of the product within an existing portfolio is the expectation. If the structure and administrative processes developed for an internal venture are not compatible with the host organization’s design, a potential exists for major organization change or serious organization conflict (Baldridge & Burnham, 1975). It is not uncommon for intrapreneurial values to clash with more mature product environments. If a new venture is related to existing products, then political opportunism and turf problems are common (Bart, 1988). Successful internal ventures introduce changes in organizational values. A series of successful ventures can alter the definition of relatedness within a firm (Jelinek, 1986). Either event can initiate corporate restructuring because the firm is already invested in the project (Baldridge & Burnham, 1975).
Chandler (1962) articulated an organizational life cycle model that relied on transition from an initial entrepreneurial phase of organizational experience to more mature phases as product diversity increases. Greiner (1972) refers to installing capable business managers to replace the entrepreneurs who originated the organization. Smith and Miner (1983) observe that entrepreneurs are not like top level corporate managers. They are less favorable toward authority figures and less assertive than the typical top-level manager in a large organization. This observation suggests that a large proportion of entrepreneurs would have difficulty heading a growing organization when it becomes large enough to require a bureaucratic structure (Smith & Miner, 1983). Successful innovation yields organizational growth (and complexity). Growth and complexity require more complex organizational forms and structures. New organizational form (coupled with incompatibility of entrepreneur’s style) necessitates a shift in the firm’s power structure and a redesign of the firm. Taken together these factors indicate intrapreneurship and internal venture would be a mixed blessing in terms of human resource demands, structural changes, conflict with existing values, norms and culture, and continuation of a strategy configuration.
Market issues. Internal ventures are at times initiated for reasons that introduce market or technology problems. This condition is particularly likely if top management considers internal ventures as insurance against a mainstream businesses going bad (Burgelman & Maidique, 1988). Market or technology problems are also high if internal venture units become the dumping ground for “misfit” or orphan” projects (Bart, 1988). Strong corporate development policies can limit internal dumping. Cross-functional communication can reduce the potential for including unneeded features or omitting important features. Internal ventures and intrapreneurship often operate on a shoestring in early stages and thus coordination across functional activities is often more haphazard. Inconsistency can create a moderate risk of over-commitment to a low value product (Bart, 1988). Structural autonomy and the delayed involvement of corporate-level evaluation introduces increased risks of over-differentiation (Biggadike, 1979).
If the new venture was initiated in response to a perceived market need, the likelihood of omitting important, high value product characteristics are lower than if the new venture was triggered by a brainstorm idea looking for a home. Roberts and Berry (1985) concluded that to ensure high performance, new venture activities should take place in areas related to the firm’s base business. They caution that if internal ventures are undertaken in new market or technology areas, the firm must first make a sizeable investment in gaining familiarity with the new territory. Although this constraint severely limits the horizons of new ventures, familiarity and success were shown to have a strong correlation.
Timing. The timing of technology implementation is facilitated by the relative freedom and informality of intrapreneurial and internal venture routes to innovation. Kanter (1983) explains that effective internal ventures permit a firm to think in the long-term, but tap decentralized organization resources that enable the firm to act on a much shorter time horizon. New venture activities broadly stimulate employees to develop ideas from the bottom up. This provides a constant stream of options and can help a firm move quickly.
It should be noted that capacity limitations can easily disrupt timing intentions (Bart, 1988). Often, first-mover advantages require a sizeable investment and large scale action (Porter, 1985). Although new venture approaches to innovation are often strong on knowing what action is needed, they are notably weaker on controlling resources necessary for implementation.
Exploitation capabilities. Leonard-Barton (1987) convincingly argues that integrative innovation requires a reciprocal process of incrementally altering the technology to fit the user organization and simultaneously shaping the user environment to exploit the technology. Technology advances in robotics, for example, offer innovative opportunities for users to alter their manufacturing processes, product characteristics, and managerial processes (Lengnick-Hall, 1986). Integrative innovation requires expertise in managing interdependencies (Ansoff, 1988). The organic nature of intrapreneurial and internal venture activities fits this requirement well.
Many of the financial opportunities and constraints that affect R&D have a similar influence on intrapreneurship and internal venture activities. Resource commitment is higher on a project-by-project basis with intrapreneurship and internal ventures, but can be lower for overall corporate entrepreneurship activities. Corporate-level involvement is usually delayed; therefore, early investments are drawn from organizational slack (Burgelman & Maidique, 1988). The project can be disbanded at many points along the way, leading to greater cost controllability (Roberts & Froman, 1972). Combined, these characteristics limit the potential for financial over-commitment. Required cross-functional communication at early stages of development (Burgelman, 1983) can spark excitement and generate financial commitment to a project. High visibility of intrapreneurship and internal venture activities, as well as the effective use of champions, limits underfunding. Resource sufficiency is enhanced by the enthusiasm that typically accompanies new ventures. Efficient resource allocation is encouraged by competition between ongoing operations and the uncertainties of entrepreneurial projects (Roberts & Forman, 1972).
External Joint Ventures
A joint venture is a cooperative agreement between firms to achieve a common objective. Joint ventures may be formalized through a temporary organization or may reflect complex networking and contractual agreements. This approach involves two or more firms pooling their resources to achieve innovation (Schillaci, 1987). Each partner is expected to make unique contributions. No partner is required to have all the needed skills or resources. Partners can concentrate in those areas where they possess the greatest relative competence while diversifying into attractive, yet unfamiliar, business areas (Harrigan, 1985). Joint ventures are successfully exploited by General Electric, Monsanto, and General Motors.
Configuration. Configuration risks are great with designs for entrepreneurship that rely heavily on talents and relationships outside the firm’s existing boundaries. With joint ventures, the greatest threats are to future organization stability and demands on human resources (Schillaci, 1987). Often joint ventures involve a new competitive orientation that, if successful, leads to changes in strategic direction and values. Because problem-solving is undertaken with an external partner, managers have less control over innovation procedures and expectations than with internal modes of innovation.
Interestingly, joint ventures undertaken with diversified partners have greater success than those with single-business partners (Killing, 1980). This success stems from an ability to design agreements that focus solely on the specific capabilities of interest and from a demonstrated prowess for managing and coordinating internal differentiation. As Harrigan (1985) points out, strategic barriers make joint ventures difficult to manage. Firms must accept uncertainty in management and operations. This uncertainty makes heavy demands on human resources, because employees lack a traditional home base (Schillaci, 1987). Although risks of product failure are lower than with internally-based corporate entrepreneurship, the potential for upsetting the strategy configuration is much greater. Complex external linkages must be guided and problem solving is not constrained by organization values and capabilities (Roberts & Berry, 1985). Joint ventures are precursors to major organization change if the venture is successful (Schillaci, 1987). If the joint venture is unsuccessful, however, the exit costs are low.
Market issues. Joint ventures provide easier and quicker competitive access to new products and markets than do internal designs for corporate entrepreneurship (Harrigan, 1985). Joint ventures require specific corporate choices early in the innovation process. Because firms contribute diverse competencies, problems associated with internal approaches to innovation occur more often than problems associated with inadequate product or market development expertise and with the omission of critical features of product design, production, or distribution. Schillaci (1987) argues that those participating in joint ventures can use technology skills and knowledge not widely available and can gain access to critical elements of the manufacturing process. However, problems associated with the inclusion of unnecessary product or service features and thus with too much differentiation (Porter, 1985) remain moderate because firms may each seek to include what they consider their “best” characteristics. Joint ventures are strong in their ability to exclude low-value elements in the value chain, but are only moderately successful in selecting among potentially high-value features.
Timing. The real strength of joint ventures lies in an ability to capitalize on timing expertise and to exploit new technology development (Schillaci, 1987). This strength is particularly evident in industry situations that favor early follower strategies (Anderson & Tushman, 1990). Because of the breadth of expertise available, joint venture partners understand the market setting. Autonomy permits timely action. Often various participants (e.g., buyers, suppliers) contributing to an industry’s structure are represented (Porter, 1980). This situation enables the participants to reduce uncertainty and choose wisely between synergy and strategic flexibility (Ansoff, 1988).
Joint venture approaches to innovation enable a firm to capitalize on timing expertise even if the technology and market terrain is unfamiliar (Roberts & Berry, 1985). Joint ventures enable firms to quickly bridge the gap between know-how and action. Timing advantages are an important competitive advantage associated with joint venture approaches to innovation.
Exploitation capabilities. Because joint venture firms contribute different competencies to the total effort, wise selection of joint venture partners virtually assures that all needed exploitation capabilities will be available. However, a willingness to act (Ansoff, 1988) is just as important as the ability to act. Communication, information processing, negotiation, and political skills become essential in managing effective joint ventures.
Required cash outlay varies among the partners. Often a substantial cash contribution is required from one firm to gain the expertise or scarce non-fiscal resources of another firm. Thus, resource problems generally accrue to firms that can afford them, and the overall financial risk is relatively low (Killing, 1980). In addition, joint venture partners often have an enhanced access to external capital (Schillaci, 1987). This gives joint ventures high marks on resource sufficiency. The political realities of joint ventures tend to moderate the efficient allocation of resources (Killing, 1980).
Acquisition traditionally involves innovation through the purchase or stock merger of existing firms (Killing, 1980). More recently, Pisano (1990) suggested that contracting offers an important forum for acquiring technology and innovation, particularly in the case of potentially “competence-destroying” technology change. Acquisition is a route to entrepreneurship frequently undertaken in the service sector (e.g., Hospital Corporation of America). Effective acquisition requires early goal clarification because a solution and implementation processes are purchased (Marquis, 1972).
Configuration. The acquired business has an existing structure, administrative processes, and culture that must be effectively managed if the acquisition is to provide the intended benefits (Nahavandi & Malekzadeh, 1988). Particularly if synergy is expected, the acquired firm must be carefully blended with the acquiring organization (Ansoff, 1988; Schweiger, Ivancevich, & Power, 1987). Often organizational design details of the acquired firm and the new parent are quite different because the presence of diverse capabilities provided the incentive for the purchase (Roberts & Berry, 1985). These differences introduce serious threats to the configurations of both the acquiring firm and the acquired firm. Nahavandi and Malekzadeh (1988) assert that the preferred mode of acculturation between the acquiring firm and the acquired firm are dependent on two factors. First, the best approach depends on the extent to which members of the acquired firm value their culture and organization practices. Second, the appropriate approach depends on whether or not the acquirer is seen as attractive by the acquiree. Threats to the configuration are greatest if the acquirer and the acquired firm prefer different modes of acculturation (i.e., integration, assimilation, separation, deculturation) and if die acquired firm does not perceive the acquirer as attractive.
Significantly, joining firms with unique cultures and practices presents substantial organizational problems that cannot be erased by intensive pre-acquisition preparation (Schweiger et. al., 1987). Because the incentive for innovation-derived acquisition is a capability that the purchasing firm does not presently have, the probability of significant cultural differences between the two companies is great (Roberts & Berry, 1985). Communication capabilities are often strained by new jargon and diverse assumptions. Organizational values may generate resistance due to a “not invented here” syndrome (Schweiger et. al., 1987). In addition, human resources are often threatened by a potential reduction in force reflecting newly redundant activities (Nahavandi & Malekzadeh, 1988). If the purpose of an acquisition is to gain a human resource capability (e.g., a management team) or a key individual (e.g., a research scientist), inequities may be created in encouraging those key people to stay with the organization after the acquisition (Jemison & Sitkin, 1986). Nahavandi and Malekzadeh (1988) suggest that even mutually attractive acquisitions pose major problems for a firm’s structure, its orientation, its human resources, and its configuration.
Market issues. Achieving innovation through acquisition generally provides greater certainty regarding product, market, and technology choices than any of the other innovation methods (Roberts & Berry, 1985). Acquisitions typically take place after technological uncertainty in a new market area has been resolved. If the acquiring firm is familiar with the customer’s value chain, the advantages present in R&D approaches are also associated with acquisition. With familiarity, acquisition approaches are very strong on including high-value features. Given the level of investment required, innovation through acquisition is less likely than R&D to inappropriately emphasize low-value features. If the acquiring firm is using the acquisition as a vehicle to enter foreign territory, it expects to buy market expertise (Roberts & Berry, 1985). The acquired firm has demonstrated prior competence in selecting high-value features and excluding low-value features. The acquirer is betting on a continuation of this judgment. This proven performance is obtained though greater initial financial investment and through greater long-term organizational, value-based and human resource costs.
Timing. Acquisition generally precludes first-mover timing advantages because the innovation is typically market-ready (Porter, 1985). Acquisition does, however, enable a firm to develop new product-market packages more quickly than in-house development (Drucker, 1985). Thus, acquisition offers early follower advantages.
Exploitation capabilities. Extensive research on relatedness (e.g., Chatterjee, 1986; Kusewitt, 1985; Montgomery & Wilson, 1986) demonstrates that firms relying on acquisition to move into related businesses typically outperform firms that use acquisition to diversify into unrelated areas. Related acquisitions offer advantages of operating synergy, common managerial experiences, similar compensation systems and other communalities. Realizing these potential advantages, however, requires a clear strategy for creating effective interfaces between the firms (Nahavandi & Malekzadeh, 1988). One of the key corporate competencies needed to gain competitive advantage from innovation through acquisition is an ability to blend separate corporate cultures (Kusewitt, 1985). The implication is, therefore, that acquisition approaches to innovation can introduce important contradictions between preserving the configuration and exploiting the potential benefits of the acquisition.
Acquisitions require large initial cash outlays, thus raising potential financial stakes and introducing problems associated with escalation of commitment to poor strategic choices (Killing, 1980). Acquisitions require large initial cash outlays compared to the more incremental investments associated with R&D or joint ventures (Ebeling & Doorley, 1983). Even in uncontested acquisitions, the purchasing company frequently offers a premium over market value to secure the purchase (Parsons, 1984). Ebeling and Doorley (1983) describe the financial aspects of acquisition as a net benefit compared to other approaches to innovation. Acquisition costs are generally known with greater certainty than the costs of competing routes to innovation. Consequently, the potential for efficient resource allocation is enhanced and likelihood of underfunding is reduced. However, financial consequences of an unsuccessful acquisition are large and immediate. Yet, if an acquisition turns sour, it can easily become a cash trap because increased investment is insufficient to manage an effective turnaround (Allaire & Firsirotu, 1985).
Building Blocks for Understanding Innovation and Competitive Advantage
Four factors define the relationship between innovation and competitive advantage: (a) capitalizing on the strategic configuration; (b) making product/market choices that emphasize high value factors and exclude both low value factors and excessive differentiation; (c) capitalizing on industry-specific timing advantages; and (d) nurturing the specific organizational capabilities that enable the firm to exploit the results of innovation activity. Each of the four routes to innovation discussed demonstrate different profiles in terms of their comparative strengths and weaknesses along these dimensions.
The success of an R&D approach to innovation is likely to hinge on the firm’s information-processing and decision-making prowess, its funding perspective, and the creativity with which it develops and uses measurement and assessment tools. With the exception of threats from unrelated substitute technologies, R&D approaches are well suited to recognize potential timing advantages, but somewhat less well positioned to exploit such advantages. R&D is strong in terms of including high-value features, but potentially vulnerable to also including irrelevant or low-value features. Configuration threats are generally mild, with the exceptions of firms that accelerate out of control in the quest for innovation.
Internal venture approaches to innovation present a moderate threat to the firm’s configuration. In terms of both the selection of appropriate and inappropriate features and timing, internal ventures offer a mixed blessing as well. The most important strength of this approach to innovation is the ability of internal ventures to exploit organizational capabilities.
Joint venture approaches to innovation are very strong in terms of timing advantages and on exploiting technology, as well as financial and other organization capabilities. Joint ventures present a serious threat to a firm’s configuration if the innovation project is successful, but the risk is minimal with unsuccessful ventures. The ability to effectively screen product features and preferences is moderate at best because it reflects political and negotiation skills as much as market expertise.
Innovation through acquisition is strong in terms of making wise decisions in selecting or excluding options and features. Acquisition approaches can provide timing advantages in early-follower circumstances, but forfeit any potential first-mover advantages. Many of the capabilities that are required to successfully exploit innovation through acquisition also serve to introduce contradictions and problems for preserving the firm’s configuration. In this way, the greatest strength of a successful acquisition is its potential for revitalization and changing a firm’s center of gravity. At the same time, the greatest risk is the loss of identity and corporate focus that sustains long term competitive advantage.
Further Questions and a Research Agenda
One consistent theme is a need for some measure of complementarity (or fit) between innovation-related decisions and other strategic choices. Fit is defined here as having a product/market strategy that is compatible with the opportunities and limitations in the environment and, in addition, having an organization design that meets the needs of the product/market scope and gives rise to sources of competitive advantage and synergy (Miller & Mintzberg, 1984). What remains unresolved is whether fit should be the objective of a planning model (Lorange, 1982) or whether fit should be seen as a constraint in a strategic control model (Lorange, Morton, & Groshal, 1986). The choice reflects assumptions about both organizational locus of control and assumptions about the rate and predictability of contextual change. As the rate of change accelerates and the direction of change becomes more unpredictable, the relative importance of strategic control increases (Gilbert, Hartman, Muriel, & Freeman, 1988). Debate over the relationship and relative priority of planning systems versus control systems is a source of controversy. Although it is clear that communication, coordination, and integration of innovation activities with other elements in the configuration are necessary, it is not clear these can be accomplished efficiently. Likewise, market shifts, development of new capabilities, diversification, and other consequences of successful innovative activities will present threats to the configuration. Taken to an extreme, a firm can become a classic “reactor” (Miles et. al., 1978) and lose its competitive advantage. We know this interaction occurs, but we have little knowledge of the early warning signals of dysfunctional disruptions to the configuration. Identification of such signals would be an important contribution to our ability to manage the innovation process to achieve competitive advantage.
A related debate surrounds the triggers for innovation. Is innovation primarily a response to environmental events, a requisite adaptation to insure survival, or ian activity inspired by managerial choice and selection (Hrebiniak & Joyce, 1985)? Ravenscraft and Scherer (1982) suggest that small firms produce somewhat different types of innovations than do large firms. Moreover, the rate of innovation is greater on average for small firms than for large firms (Cohen, Levin, & Mowery, 1987). These findings imply a resource dependency model. However, Cohen, et. al. (1987) also found significant industry differences in innovation activity, lending support for population ecology models. Although some measure of mutual causation seems the most likely answer, managers have difficulty positioning their firm and their beliefs appropriately on the continuum between environmental determinism and organizational volition. This issue parallels the controversy in organization theory over resource dependency models versus natural selection models (Aldrich & Pfeffer, 1986).
This dialogue becomes increasingly important when we consider organizational change and pressures on the configuration. Allaire and Firsirotu (1985) argue that diagnosing a need for change is one of the most difficult tasks that managers encounter, particularly if change is in response to anticipated environmental shifts rather than a preemptive effort to shape the marketplace. If we accept a deterministic view, what magnitude of environmental change is necessary to signal a need to creatively redefine the competitive situation? Hambrick and D’Aveni (1988) provide a convincing argument that if environmental triggers prevail, a firm is better off with a highly turbulent environment. With turbulence, changes are abrupt and of sufficient magnitude to prevent a need for change from being ignored. More benign environments, in contrast, may lull a firm into a false security in its current position. Hambrick and D’Aveni (1988) offer a graphic illustration from a biology study, in which a frog plunged into boiling water will jump out, but a frog placed in tepid water that is slowly brought to a boil will remain and be cooked. If innovation is determined by environmental events, firms need sensitive thermometers to assess changes in temperature. This argues for an emphasis on innovation approaches that favor exploitation capabilities.
In contrast, if innovation is the result of managerial choice, the firm’s strategic decision making needs to be firmly grounded in reality (Aldrich & Pfeffer, 1976). Innovation is a more successful source of competitive advantage when it reflects a well of organizational strengths and competencies rather than a desperate move to overcome weakness or perceived competitive threats (Ansoff, 1988). At the same time, excessive reliance on previous success patterns can push a firm into a dysfunctional trajectory (Miller, 1990). Choice-initiated innovation argues for priority on market and timing advantages in selecting an innovation method. Better understanding of the tension between environmental pressures and managerial choice offers important insights into the tension between reacting to market realities and maintaining an effective configuration.
Our understanding of the triggers for innovation also lead to important differences in the way in which innovation and entrepreneurial strategy is conceptualized. Judgments regarding antecedents, correlates, and consequences of innovation are a second area worthy of further investigation. Some (i.e., Malekzadeh, et al., 1989; Geringer & Hebert, 1989) define technology strategy from a decision-making perspective. Here the focus is on managerial choices and consequences. Others (i.e., Merenda & Irwin, 1989) define innovation from an evolutionary perspective. From an evolutionary reference point, the emphasis is on organizational learning and adaptation. Still others (i.e., Hill & Hansen, 1989), see corporate innovation as an inevitable consequence of other events. A reactionary view means that efforts should be directed toward identification and prediction of relevant events. Investigation into the role of organizational slack illustrates the need to resolve some of these issues.
The link between organizational slack and the incentive or need for innovative behaviors is unclear. Slack is defined as a cushion of actual or potential resources (Bourjois, 1981) that may or may not be currently in use (i.e., absorbed) by the organization (Meyer, 1982). Cyert and March (1963) argue that slack permits innovation by providing a firm with the opportunity to expand its time horizons, make mistakes, and take risks. Tushman and Romanelli (1985) present an equally compelling argument that organizational slack breeds complacent behavior and undermines any incentive to take risks, pursue creative options, or develop innovative ideas.
There is strong empirical support for co-variation of factors such as slack, size, industry characteristics, technological intensity, and innovation, but there is a need for further conceptual development to separate antecedent causes from outcomes of innovation activities. Development of a causal model would be an important step in understanding the interaction between corporate competencies, innovation, and competitive advantage.
A further challenge involves identification of purposeful expectations for corporate entrepreneurship. Some (i.e., Mitchell, 1988; Waterman, 1987) argue that innovation expenditures should be directed toward creating options rather than toward traditional investment and return perspectives. Others, (i.e., Spencer & Triant, 1989) contend that to be successful an innovation budget must be managed as an investment with specific expectations for return. The importance of this issue rests with implications for the infrastructure surrounding innovation and the accompanying expectations for organizational change. If innovation is treated as a traditional investment and return cycle, any requirements for organizational change are assumed to be predictable. Such predictability invokes a planning model, rational decision making and a host of formal managerial and analytic tools. If, on the other hand, innovation is seen as a creative approach to generating options, then the need for change becomes more varied and is more likely the result of strategic control devices than formal planning mechanisms. This debate reflects many of the same differences in assumptions that Barney (1990) articulates as distinguishing traditional management theory from organizational economics. As he suggests, the best answers likely will come from drawing important ideas from both perspectives. A useful model might draw from utility approaches to identify specific threshold points and discrete trade-off issues in investments that expand the firm’s capability base but potentially undermine the configuration, compared to those that reinforce the configuration but potentially push the firm’s capabilities into overdrive.
A greater understanding of diverse ways to handle interdependence and dynamic interactions associated with innovation activities would provide additional insights into the role of configuration in developing competitive advantage from innovation. Some prescriptive frameworks view all the elements in a strategic configuration as relatively balanced in importance and in terms of their level of mutual interdependence. Others envision a hierarchically arranged interdependence. Malekzadeh et. al (1989) for example, see portfolio choices and product mix as jointly influencing technology competence. Technology competence and technology source yield a technology strategy. Others (e.g., Brockhoff & Chakrabarti, 1988) see a particular aspect of innovation choice (e.g., choice of internal versus external source of innovation, reliance on wildcat entrepreneurs) as the key element driving all other decisions. Prahalad and Hamel (1990), for example, argue that the way in which a firm exploits its core technology tends to drive most other strategic options. A third approach considers various factors in a balanced manner to derive a comprehensive innovation strategy (e.g. Galbraith & Schendel, 1983). This latter perspective is similar to the concept of strategic configurations Miller, 1986) that attempt to identify packages of strategy components that complement each other, but do not try to specify direct causal connections.
The assumptions underlying each of these identified areas of debate reflect unresolved issues in related disciplines. Many studies of corporate entrepreneurship assume a particular perspective is correct, then test interactions within that frame of reference. Our knowledge of corporate entrepreneurship and its links with competitive strategy would be greatly enhanced if the fundamental assumptions of various perspectives were subjected to more direct empirical examination.
Achieving Sustained Corporate Entrepreneurship
The most pervasive questions surround the determinants of successful corporate entrepreneurship and the specific corporate competencies that translate innovation into competitive advantage under specific contingent conditions. There are a number of empirically recognized correlates to successful innovation in large organizations. For example, corporate entrepreneurship generally is accompanied by managerial networking at multiple organizational levels (Burgelman, 1984). In order for a business to be receptive to entrepreneurship, innovative performance must be included in the measures by which people are routinely evaluated (Hubbard, 1986). Adoption of administrative innovations tends to trigger the adoption of technical innovations more readily than the reverse (Damanpour & Evan, 1984). Certain strategic mindframes are expected to foster heightened innovation success. It has been argued, for example, that a policy of “rationalized diversity” (Leontiades, 1982) introduces opportunities for knowledge and technology transfer and, thus, increases analogy-based innovation.
Brown and Karagozoglu (1989) contend the most critical decisions leading to effective entrepreneurship are those surrounding the overall firm strategy, technology policy, and the values of top managers. Crucial implementation decisions determine organization structure, information flows, personnel flow, and the specification of key roles for innovative action. Baldridge and Burnham (1975) argue that high levels of complexity and large size promote innovation by encouraging specialized expertise in subunits and by generating critical masses of problems that demand solutions. One proposed ingredient then is specialized expertise. This premise reflects assumptions about knowledge, skills, and ability requirements for successful innovation. Second, a recognized need for critical problems reflects assumptions about the purposiveness of innovation.
Strategic complexity is correlated with information-processing intensity and managerial interaction. A strategy of innovation differentiation (Porter, 1985) has been empirically linked to information processing, interaction, and corporate assertiveness (Miller, 1989). Cost leadership, in contrast, has few strong ties with decision-making practices. Focus, or targeting, strategies appear negatively correlated. Consequently, effective management of a firm’s information-processing capabilities is an important competence accompanying innovation.
Quinn (1979) identified a number of characteristics in firms that successfully maintain large-scale innovation. A firm should have strong incentives for successful development and thus a contingent reward criterion. There should be clearly defined needs therein stipulating goal clarity, agreement, and commitment. Multiple competing approaches improve the odds of successful innovation. Open systems leading to equifinality thereby are a precondition for corporate entrepreneurship. Quinn (1979) notes that long time horizons (perhaps to provide for fermentation), committed champions (to provide the passion), and top-level risk-taking support (to provide the necessary buffers) are important elements in fostering innovation. High team morale due to a common goal appears to accompany successful innovation. Yet, for each of these factors it is not clear whether the variable is a cause or an effect.
Hallmarks of successful individual efforts toward innovation are equally prevalent. These include personal commitment (often fanaticism), acceptance of chaos and setbacks, low early costs, few detailed controls, incentives that match the risks, long time horizons, flexible financial support, multiple competing approaches and a need-based orientation (Quinn, 1979). Rule and Irwin (1988) introduce five effective methods for fostering intrapreneurship. These are: (a) forming innovation teams and task forces, (b) recruitment of new staff, (c) application of strategic planning, (d) use of customer focus groups, and (e) use of in-house R&D. Pearson (1988) lists an environment that puts constant pressure on everyone to beat specific competitors at innovation as a condition for effective corporate entrepreneurship. In other words, firms should be structured so that innovation is supported and not thwarted. Managers should know where to look for good ideas and should be adept at pursuing such ideas at full speed. Sustained innovation requires both stability and change (Tushman & Nadler, 1986). Stability permits scale economies and incremental learning whereas change produces experimentation and novelty in products, processes, and technologies. It is not clear, however, how these factors can be institutionalized to promote successful innovation. Nor is it clear which of these represent dependent variables and which are independent variables.
Clearly, if all firms were equally innovative, corporate entrepreneurship would become a basic business requirement rather than a source of competitive advantage (Porter, 1985). This condition would not be desirable because greater option variety offers more opportunities for success. However, a nagging question remains. If it were truly as simple as following a set of prescriptions (regardless of the number) or establishing a set of specified organizational conditions, why aren’t more of the firms that are dependent on innovation successfully entrepreneurial/intrapreneurial? Perhaps our exploration of successful innovative organizations has uncovered characteristics that accompany successful streams of innovation, but has overlooked or overwhelmed important causal elements. Stated differently, we have established co-variation. The next step is to establish temporal precedence and to eliminate alternate explanations for the desired phenomenon.
An example illustrates the current level of understanding. Performance is a function of motivation and ability. Contingent rewards for innovation may supply the motivation, but what are the crucial knowledge, skills and abilities at the individual and institutional levels of analysis that complete the equation? Clear, specific, difficult but achievable goals are critical components for guiding performance in desirable directions. The issue remains of how these goals should be derived, who they should represent, and whether they should specify product applications, product capabilities, corporate competencies, or behavioral processes to promote successful innovation. Identifying when goals become sources of fear rather than triggers for invention remains unresolved. How does a firm identify people who are not only passionately committed to an idea, but able to sort through creative options to pluck out a viable concept that is in the best interest of numerous stakeholders? When does equifinality result in spreading oneself too thin?
From the opposite design perspective, organization characteristics that inhibit innovation are also well known. Among these are lack of organizational acceptance of the fanatic’s personality (with tangential implications for strong organizational culture and shared values) expectations of orderly advances or progress toward a goal (with the implications for traditional planning and accounting systems), spending too much early on in a project, expecting detailed controls too soon, few rewards for risk-takers, and a short-term orientation (Quinn, 1979). Some have noted that marketing is an identifiable, and arguably primary cause of innovation failure (Brockhoff & Chakrabarti, 1988). It is more plausibly suggested that the reasons for product innovation failure are imbedded in the complex and multidimensional web of events related to the fit between strategic behavior and the demands of the competitive environment. One serious mistake that firms can make is to believe they can be selective about the time to introduce new technology of significant customer value (Craig, 1986).
Questions arise from the continuing need for change that an adjustment to innovation engenders. Early on, innovation/technology was assumed to be either adopted or not adopted. However, adoption is clearly a necessary but not a sufficient condition for innovation implementation. A change in both the technology and the user environment is the most beneficial arrangement, carrying with it implications for exploitation capabilities and the configuration and raising questions for organizations as learning systems. How can an innovative firm serve as an enabling system as well as a providing system? It is apparent that successful utilization depends largely on what takes place after the initial development or acquisition of technology (Leonard-Burton, 1987). For example, as firms develop innovative production capabilities that facilitate computer-integrated manufacturing, a number of significant organization changes take place (Lengnick-Hall, 1986). Organization boundaries between work units, line and staff activities, and between the organization and its environment become less sharp. Similarly, automation implies that machines increasingly perform direct production activities, thus reducing the individual’s responsibility for productivity. Measurement for rewards concentrate less on individual contributions and more on group outcomes, reflecting the increased interdependence across organizational activities. Often, economies of scope replace economies of scale, causing redefinition of a firm’s product and market arena. Organizational competencies in information analysis and communication that enable a firm to exploit manufacturing flexibility increase in importance while traditional supervisory roles and planning systems become less influential. Each of these consequences creates new problems for the firm to resolve.
Continuous change can place exceptional demands on a firm’s human resources. Ongoing coordination needs mean that more employees must coordinate across traditional boundaries. Such boundary spanning roles are demanding and lead to high levels of stress, burnout, and turnover. Innovation often requires persistent and heroic qualities on the part of the intrapreneur, yet ample rewards for the intrapreneur’s personal career risks can lead to perceived inequity on the part of employees responsible for equally important but more routine activities. Innovations resulting from external activities such as joint ventures or acquisition, often create problems with duplicate roles or excess personnel. In addition, continuous changes mean continuous uncertainty with few standard procedures or frames of reference to provide guidance. As a result, trust becomes increasingly important, even as it becomes more challenging to establish. Ansoff (1988) argues that traditional decision rules are inapplicable under this degree of turbulence and uncertainty. We know many of the questions, but have not fully developed new guidelines and paradigms to respond to them.
Technological innovation initiates changes in manufacturing, including design, development, and the introduction of new production practices. Management’s problem (or opportunity) is to select only those ideas that can be successfully implemented within die operational, political, competitive, and financial constraints of the firm (Morris, 1990). This condition does not mean that substantial shifts in strategy, design, and policies cannot occur. It does mean, however, that these changes are substantial, pervasive, often difficult, and frequently challenge the traditional norms of an organization (Lengnick-Hall, 1986). As Allaire and Firsirotu (1985) point out, recognizing the need for change is frequently one of the most knotty problems an organization must overcome. Two persistent issues have plagued industrial research and development during the past decade: a failure to recognize the strategic implications of technical innovations and the adverse affect of a short-range financial perspective (Mitchell, 1988). These issues illustrate the continuing tension between market realities and current organizational capabilities. The selection of a specific route to innovation emphasizes one factor or the other by default if not by design.
Context in which innovation is undertaken also raises important questions. Research by Hambrick and D’Aveni (1988), for example, suggests that innovation may, under certain circumstances, accelerate organization demise. They found that during phase 1, more than 10 years prior to organizational demise, the origins of disadvantage emerged. This was followed by an early impairment period, phase 2, characterized by movement toward marginal levels of organizational slack and organizational performance. In the third phase, termed marginal existence, the firm is seriously weakened and four tendencies emerge: (a) the firm engages in extreme strategic behavior (either inaction or hyperaction), (b) the firm vacillates in its strategic behavior, yet (c) the environment is neutral and (d) working capital is adequate. The combination of these four lead to the final stage of decline. Again, during the death struggle, a firm continues to engage in extreme and vacillating strategic behavior such that organizational slack and competitive performance deteriorate sharply. Both strategic vacillation and hyperactivity are frequently correlated with innovative activity (Allaire & Firsirotu, 1985). The unresolved issues again signal the importance of gaining a better understanding of the role of configuration in creating competitive advantage.
A capability-related question that has received little examination is whether fostering innovation is primarily a design-in (i.e., inclusion of necessary characteristics) or primarily a design-out (i.e., eliminating hazards to innovation) process. If sustained innovation predominantly reflects the care and feeding of entrepreneurs, fostering innovation becomes a selection and human resource management issue. If successful innovation is a result of the structure and reward systems that foster innovative behavior, then innovation becomes an organization theory and design issue. If successful innovation results from the appropriate focusing of organizational energies and problem definition, then fostering innovation evolves into a goal formulation issue. Each of these issues derives its theoretical assumptions and methodological solutions from different bodies of knowledge. Thus, one of the most critical issues surrounding corporate entrepreneurship is developing conceptual models that identify and integrate appropriate lines of inquiry. These models must more clearly distinguish dependent and independent variables than has been done in the past. Most importantly, models must be articulated in such a way that they can be subjected to empirical investigation. It is not clear from our existing knowledge, what specific constructs and discipline paradigms are most crucial for enabling us to understand, predict, and manage innovation and competitive advantage. Empirical evidence and logical argument suggest that no single discipline perspective is sufficient. Perhaps the most challenging question is how to initiate constructive dialogs (Barney, 1990) to capitalize on the rich insights that should come from the diversity of ideas that pertain to corporate entrepreneurship.
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